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Wednesday, December 15, 2010

Here's to Your Health (Update)

When District Court Judge Henry Hudson ruled yesterday that an element of the health-care legislation--a requirement that all citizens purchase insurance--was unconstitutional, he may have had a point. Certainly, the thought of government forcing people to buy something whether they want it or not goes against a certain ideal of American freedom. But does the insurance mandate actually fail to pass constitutional muster?

Hudson pointed out that the mandate to buy health insurance differed from the seemingly similar requirement to buy auto insurance because people could choose not to own cars. You don't want to drive? You don't need to buy insurance. But if you choose to have a car, you have no choice but to purchase coverage. In contrast, the health-insurance mandate would apply to everyone and people could not opt out.

The flaw in this argument rests on the economic concept of externalities. In a perfect market, when two people freely engage in a transaction, each gains some measurable benefit: You have a pizza, the Solipsist has $10. You would rather have $10 than the pizza, and we would rather have the pizza than $10. We make the exchange, and everybody's happy. If, however, the pizza causes an unpleasant gastrointestinal event, and WOS has to suffer through it, then the pizza has a negative externality: A person uninvolved in the transaction (WOS) has suffered a "loss" (in this case, of breathable air) that the price of the pizza did not reflect. That is, we imposed a cost on WOS that we ourselves did not pay for.

This is what is known as a market failure: a case where the price of a commodity does not reflect all the costs imposed on society. When markets fail, governments step in. In the example described above, WOS might appeal to her elected representatives to remedy the situation by imposing a "gas tax" on any of the Solipsist's future pizza purchases. Instead of simply paying the pizza maker for the price of his goods and services, the Solipsist might be required to compensate WOS for the negative externalities she suffers--perhaps several hundred dollars per pizza. Fortunately, WOS has little pull with our local elected representatives.

So what does all this have to do with healthcare? Go back to Judge Hudson's distinction between health insurance and car insurance. The judge points out that a person can avoid buying car insurance by choosing not to buy a car. True enough. And what about externalities? In this case, there don't seem to be any. If the Solipsist's neighbor chooses not to buy a car, it's no skin off our back. The same can not be said of health insurance.

If our neighbor chooses not to purchase health insurance, it does impose costs on the rest of society. For one thing, it may dissuade our neighbor from seeking medical care when he or she has some highly contagious but treatable disease. More importantly, though, if our currently healthy neighbor chooses not to buy insurance, figuring he doesn't need it, then the insurance rates for everybody else go up. Indeed, with the health care legislation's mandate that insurers must cover everyone, regardless of health, the costs, as economics columnist David Leonhardt points out, will be even greater: Our neighbor will simply buy health insurance when he gets sick, imposing ALL of his costs on those people who chose to buy insurance earlier.

Of course, the major problem here is our continuing conflation of health insurance with health care: We need the latter; whether we NEED the former is a matter for serious debate. As long as we keep insisting on market-based solutions for our problems, it is incumbent upon legislators to address negative externalities and other market failures.